Government debt prices rose Thursday ahead of the monthly government employment report and after some dour economic reports were released.
"Right now, it is the labor market that is taking the center stage for market movements," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson.
The bond market has been largely ignoring negative economic data in recent weeks, as prices trend lower in the face of record amounts of supply headed to market.
But weak readings on the labor market did get investors' attention. Investors were tucking their assets into the safety of government bonds.
"Jobs are the driver of the economy," said Hurley. "Jobs affect everything, if people don't have jobs they don't spend money, it will be difficult for them to save."
The government reported Thursday that the number of Americans filing for first-time unemployment benefitssurged last week to 626,000, the highest level since October 1982. Also Thursday, retail stores reported that cash-strapped consumers continued to reign in their spending.
The government was set to release its jobs report for January on Friday. The Labor Department report is expected to report that employers slashed 500,000 jobs in January, with the unemployment rate increasing to 7.5% from 7.2% the month prior, according to a consensus estimate of economists compiled by Briefing.com.
A pair of labor market reports out Wednesday painted a very bleak picture, increasing investor anxiety ahead of the government's report. The number of planned job cuts announced in the January surged to the highest level in seven years, according to outplacement firm Challenger, Gray & Christmas Inc.
ADP's National Employment Report, also out Wednesday, reported that private-sector employers cut 522,000 jobs.
Supply is second stage: Investors' anxiety about the recession supported demand for Treasurys, and the supply issue moved "temporarily in the background," said Hurley. But the ever-increasing supply of debt headed to market will come back into focus down the road.
Bonds have traded in a narrow range as investors flip their focus between the recession and the torrent of supply headed to market. Weak economic data increase demand for the safety of Treasurys, pushing prices higher. Increased supply in the pipelines depresses prices.
"We have two different, competing factors at work - the slow economy and very heavy supply - and it is just a question of which one takes precedence," said Hurley. "Right now, today, the slowing economy takes more importance especially because we get unemployment tomorrow. Next week, I am surmising that it is supply that takes precedence."
As the recession cuts into tax receipts and expensive economic rescue packages add to the nation's deficit, the government has been forced to bring record volumes of debt to market.
President Obama has been working to push an $885 billion stimulus plan through Congress, and that comes in addition to a $700 billion financial services bailout plan passed by the Bush administration.
The Treasury announced a record $67 billion quarterly refunding on Wednesday, which included the re-introduction of the 7-year note. The refunding announcement includes updates to the longer-maturity auction schedule. The government has brought over $100 billion worth of short term debt to the block each week for the last few weeks.
Debt prices: Government bond prices gave up some of the early session gains in the afternoon as the stock market rallied, signaling investor confidence even in the face of dour economic news.
The benchmark 10-year note was up 6/32 to 107-1/32 and its yield was 2.92%. Government bond prices and yields move in opposite directions.
The 30-year bond rose 23/32 to 115-10/32 and its yield fell to 3.65%. The 2-year note ticked up less than 1/32 to 99-28/32 and its yield dipped to 0.99%.
The yield on the 3-month Treasury bill was 0.29% Thursday, down from 0.30% late Wednesday. The 3-month bill has been used as a short-term gauge of confidence in the marketplace, because investors tend to shuffle funds in and out of the bill as they assess risk in other places - the lower the yield, the more risk they see.
Lending rates: The 3-month Libor rate held steady Thursday at 1.24%, according to data made available on Bloomberg.com. Meanwhile, the overnight Libor rate jumped to 0.32% from 0.25%.
Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London, and it is used to calculate adjustable-rate mortgages. More than $350 billion in assets are tied to Libor.
Two credit market gauges were mixed. The "TED" spread widened Thursday to 0.95 percentage point from 0.94 percentage point Wednesday. The bigger the TED spread, the less willing investors are to take risks. The rate surged as the credit crisis gripped the economy, but it has since fallen off as central banks around the world have lowered interest rates and pumped liquidity into the economy.
Another market indicator, the Libor-OIS spread, dipped Thursday to 0.98 percentage point from 0.99 percentage point the day before. The Libor-OIS spread measures how much cash is available for lending between banks and is used for determining lending rates. The narrower the spread, the more cash is available for lending.
Commercial paper: A Fed report released Thursday showed that a key form of business lending contracted for the fourth week in a row. The amount of so-called commercial paper that was sold in the seven days ended Feb. 4 dipped slightly by $4.4 billion, or 0.2%, to a seasonally adjusted $1.585 trillion.
The Fed's Commercial Paper Funding Facility, which started in late October, allows companies to sell highly rated 3-month debt to the government in exchange for ultra-low interest rates.
Commercial paper is short-term debt that big businesses and financial institutions issue to pay for day-to-day business operations such as payroll and utilities.
The Fed's commercial paper funding facility was a popular alternative for cash-strapped corporations at the height of the credit crunch, but demand for funding through the program has waned. Another government sponsored program, the FDIC's Temporary Liquidity Guarantee Program backs financial institution debt issued up to 10 years, a more attractive alternative for many companies.
